Richard Marzouka is a hedge-fund consultant who manages his own portfolio and blogs about his trades. He is putting up some good performance numbers (as of early February): his 74 stock picks on TipRanks.com gained an average 82.7 per cent in the year after they were made. This performance was good enough to be ranked fourth-best out of 6,313 financial bloggers.
What can you tell us about your investing approach?
I have been active in the stock market for over 20 years. There have been good times and bad times. I learned the hard way never to stand in front of a moving train. If investors are running from a sector, don't buy a stock just because it looks cheap. It can get even cheaper. Wait for the crowd to leave the building and things to settle down.
In a nutshell, try to get on the right side of money flows moving between sectors. Earlier in my investing, I just wanted to buy into undervalued companies with great new products, but now I also want to see if money is starting to rotate into the company's sector.
An example of this was buying financial stocks on the dip in mid-2017 in anticipation of a rally triggered by growing expectations of interest-rate hikes [which improve margins on loans] and reduced regulations. This helped boost my bank stocks by more than 30 per cent in a short time.
What's in your portfolio?
My current holdings include Google [parent Alphabet Inc.], Portola Pharmaceuticals, Loxo Oncology, Neurocrine Biosciences, First Solar and Micron Technology. I keep the number of stocks below 10 because it's hard to stay informed on a large number of companies.
I maintain a large cash balance as I have seen a number of perfect market conditions turn sour quickly. I love to buy high-beta stocks [they go up or down more than the stock market]; if some go into a dive, it's not too hard on the nerves because the big cash holding smooths portfolio volatility. And when I want to buy new stocks, it lets me pick times of entry without having to sell anything.
You have a fair number of biotech stocks in your portfolio – why so?
Biotech companies have positive catalysts that can be massive. It's not unusual for their stock prices to jump 40 per cent on positive news relating to a drug they are developing.
I eye entry points ahead of news events – like when a regulatory body is scheduled to rule on a proposed drug. But the stock can overshoot afterward and go into a long period of stagnation until the drug is commercialized. So, not all biotech positions are good for long-term investing.
Portola Pharma had some delays in approvals for its drug targeting various tumours but it is still expected to outperform by summer. Loxo and Neurocrine have drug candidates coming up for a ruling by spring or summer, as well.
Your most recent stock purchase was Micron Technology in late January. What's the thesis there?
Micron is in the semiconductor industry, which continues to be a great performer. In addition, after hitting a new 52-week high, Micron's stock pulled back and provides a good entry point for short- and long-term investors.
Valuation is attractive on the basis of EV/EBITDA [enterprise value-to-earnings before interest, taxes, depreciation and amortization]. Micron's reading is at 4.1, considerably below the sector's average.
Yet, the company's fundamentals remain strong, as highlighted by rapidly increasing revenues, improved margins and higher free cash flow. Return on invested capital has also improved over the past year, while research and development is being raised to promote future growth.
This interview has been edited and condensed; it also includes material from Mr. Mazouka's blog on seekingalpha.com.
Larry MacDonald is an economist, author and financial writer.